Disclaimer

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Disclaimer

• The views expressed in this presentation are
  Donald A. Rybas and are not necessarily shared
  by the Commission, the Commissioners or its staff.

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Part 1

• A View of Public Company Audits and Auditors
  from The Regulatory Perspective.

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• Sarbanes-Oxley changed the landscape of public
  company audits.
• Sarbanes-Oxley is in the process of changing the
  way public companies are audited.
• Sarbanes-Oxley changed the way public accountants
  do business.

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WILL IT REALLY MAKE A DIFFERENCE?
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PCAOB ACCOUNTING FIRM REGISTRATION

• ALL PUBLIC ACCOUNTING FIRMS RENDERING A REPORT ON
  THE FINANCIAL STATEMENTS OF SEC REGISTRANTS MUST
  BE REGISTERED WITH THE PCAOB.
• IF A REPORT IS ISSUED BY A FIRM NOT REGISTERED,
  IMMEDIATE SUSPENSION FROM PRACTICE.

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INTERNAL CONTROL REPORTS

• OVERVIEW
• REQUIRED IMPLEMENTATION
• MANAGEMENT REPORT EFFECTIVE FOR YEARS ENDING ON
  OR AFTER 11/15/04 FOR ACCELERATED FILERS
• MANAGEMENT REPORT EFFECTIVE FOR YEARS ENDING ON
  OR AFTER 07/15/05 FOR NON-ACCELERATED FILERS

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INTERNAL CONTROL REPORTS

• NEW REGULATION S-K ITEM 307 DISCLOSURE CONTROLS
  AND PROCEDURES (ITEM 9A IN FORM 10-K, ITEM 8A IN
  FORM 10-Q)
• CONCLUSIONS OF THE CEO, CFO AND OTHER PERSONS
  PERFORMING SIMILAR FUNCTIONS REGARDING
  EFFECTIVENESS OF DISCLOSURE CONTROLS AND
  PROCEDURES BASED ON REQUIRED EVALUATION

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INTERNAL CONTROL REPORTS

• NEW REGULATION S-K ITEM 308 (ITEM 9A IN FORM
  10-K, 8A IN FORM 10-Q)
• CEO CFO CERTIFICATION REQUIRES INCLUSION OF
  INTERNAL CONTROL ESTABLISHMENT AND MAINTENANCE
• FOR YEARS ENDING AFTER 11/15/04

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INTERNAL CONTROL REPORTS

• THE AUDITOR NOW HAS TO AUDIT MANAGEMENTS
  ASSERTION ABOUT THE DISCLOSURE CONTROLS AND
  PROCEDURES.
• AUDITORS HAVE A NEW STANDARD WITH WHICH TO AUDIT
  INTERNAL CONTROLS OVER FINANCIAL REPORTING

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INTERNAL CONTROL REPORTS

• PCAOB AUDITING STANDARD 2
• AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL
  REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT
  OF FINANCIAL STATEMENTS
• EFFECTIVE FOR FISCAL YEARS ENDING ON OR AFTER
  11/15/04 FOR ACCELERATED FILERS (7/15/05 FOR
  OTHERS)

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INTERNAL CONTROL REPORTS

• MUST BE COMPLETED BEFORE REPORT ON FINANCIAL
  STATEMENTS IS COMPLETED.
• WHAT HAPPENS IF THE AUDITOR FINDS A MATERIAL
  WEAKNESS IN THE CONTROLS?

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QUALIFIED REPORT!
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THAT MY FUTURE COLLEGUES,WILL NOT MAKE CEOS,
CFOS, BOARD MEMBERS, SHAREHOLDERS, COMPANY
EMPLOYEES OR WALL STREET VERY HAPPY!
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PART 2

• ENFORCEMENT
• DIVISION
• FISCAL YEAR ENDED
• SEPTEMBER 30, 2004

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SEC Enforcement FY 2004

• 639 total cases
• Largest categories
• Financial fraud and issuer reporting (28)
• Broker-dealer (22)
• Offering fraud (15)
• Investment adviser/company (14)
• Insider trading (7)
• Market manipulation (6)

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Financial Reporting and Issuer Disclosure
Actions Filed

• 179 actions filed in FY 2004
• 199 actions filed in FY 2003
• 163 in FY 2002
• 112 in FY 2001
• 103 in FY 2000
• 94 in FY 1999
• 79 in FY 1998

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Recent Actions Brought

• Enron officers Lay, Skilling, Fastow, Causey,
  Kopper, others
• WorldCom and officers
• Warnaco Group and its audit firm
• Bristol Myers Squibb
• Styling Technology Corp and officers
• Gateway, Inc. and officers
• Charter Communications

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And More . . .

• Computer Associates
• Vivendi Universal and individuals
• Qwest company, officers and employees
• General Electric
• EY Partners Cendant
• PwC Partner -- Tyco
• Gemstar entity and auditors

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Financial frauds involving --

• All areas of the financial statements and filings
• All types of industries
• All sizes of corporations
• All areas of the United States and the world
• All sizes of audit firms

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FINANCIAL REPORTING AND ISSUER DISCLOSURE
Themes and Trends
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Financial Reporting Issuer Disclosure Themes
and Trends

• Coordination with criminal authorities
• Emphasis on personal accountability
• Effort to speed up our investigations
• Hold companies accountable for non-cooperation
• Conduct of gatekeepers scrutinized
• Compliance with GAAP not always enough
• Facilitating another companys reporting
  violations may create liability
• Auditor independence remains a critical element
  of sound financial reporting

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Accountants and Auditors

• Every case raises the question

Where were the accountants and auditors?
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Process Cases

• EY Audit Partner and Senior Manager (NextCard)
• Sport Haley
• North Face - DT Audit Partner

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Basic Audit Failures

• Lack of evidence
• Over reliance on management representations
• Improper confirmation process
• Inadequate testing of internal controls

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Basic Audit Failures

• Lack of Evidence
• Failing to test at all
• Poor execution of testing
• Ignoring issues or red flags encountered
• Lack of documentation is a related issue

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Basic Audit Failures

• Over reliance on management representations
• Need to understand basis for representations
• Not just tell me but show me

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Basic Audit Failures

• Improper confirmation process
• Selection process
• Design process
• Control process
• Evaluation process

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Basic Audit Failures

• Inadequate testing of internal controls
• Ignoring the general ledger

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Other Auditor Matters and Settlements

• MCA Financial Corp Grant Thornton and Doeren
  Mayhew
• Anicom, Inc. - Gary Seidelman PwC Engagement
  Partner
• Gemstar and KPMG

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